Indonesia: Rediscover Tax Advantages for Expats – Not Just Bali

Lush rice terraces in Bali, a testament to Indonesia's natural beauty.

Indonesia as a Tax Haven

Indonesia offers an attractive special tax model for foreign skilled workers through its so-called Expat-Skilled Regime. Those who become tax residents in Indonesia for the first time and possess special qualifications in fields such as science, technology, engineering, or mathematics can be exempted from worldwide taxation for up to four years. During this period, only income from Indonesian sources is taxed, while foreign income remains completely tax-free, even with permanent residency. This special regime makes Indonesia particularly interesting for highly qualified international newcomers who wish to work there temporarily or long-term.

Generally, not much is known about Indonesia. Therefore, here are a few facts to start with. The presidential Republic of Indonesia, with its capital Jakarta, consists of over 17,500 islands and has a total area of over 1.9 million km². This makes the country more than five times the size of Germany. The population of this predominantly Southeast Asian country, with a smaller part on the Australian continent, is steadily growing and is expected to reach the 300 million mark by mid-century. Currently, approximately 274 million people live in Indonesia. About 87% of them are Muslims and 10% are Christians. Indonesia is also a multi-ethnic state, where over 360 ethnic groups live together. Most of them are of Malay origin. The national currency is the Indonesian Rupiah (IDR). In 2021, Indonesia's GDP was around 1.19 trillion US dollars, and in 2022, it is expected to rise to around 1.29 trillion. This places the country 16th among the world's largest economies. Indonesia owes this not least to its abundance of raw materials and its (related) manufacturing industry.

But what about taxes? Here, the picture is mixed. From the perspective of the Indonesian state, the situation is that companies tend to flee to tax havens rather than the other way around. This naturally implies that companies do not see Indonesia as a tax paradise.

For retirees, a move for purely tax reasons is neither an advantage nor a disadvantage. The existing double taxation agreement (DTA) with Indonesia states that German pensions will continue to be taxed in Germany even after a move to Indonesia. Of course, there are many other good reasons to spend your golden years under palm trees, e.g., in Bali. Learn more here about receiving tax-free severance payments.

Indonesia is also a tax paradise for digital nomads! The Indonesian state has realized that these working nomads also contribute to tourism...

Indonesia on the Map

Indonesia is an archipelago nation located in Southeast Asia and Oceania, between the Indian and Pacific oceans. It is the world's largest island country, with more than seventeen thousand islands, and at 270 million people, the world's fourth-most populous country and the most populous Muslim-majority country. Its strategic location makes it a significant player in regional and global trade.

The vast archipelago of Indonesia.

What Others Say About Indonesia

Indonesia is frequently highlighted by international media and organizations for its economic potential, cultural richness, and growing appeal as a destination for expats and digital nomads. Here's what some are saying:

How Indonesia's Attractive Tax System Works

Indonesia's tax system for individuals is generally based on worldwide income for tax residents. However, the game-changer for skilled foreign professionals is the Expat-Skilled Regime. This regime offers a temporary exemption from taxation on foreign-sourced income for up to four years, provided certain conditions are met, including having specific qualifications in high-demand fields (STEM).

After the initial four-year period, or for those not qualifying for the Expat-Skilled Regime, Indonesian tax residents are typically taxed on their worldwide income. Non-residents are taxed only on income sourced within Indonesia.

The progressive income tax rates for individuals range from 5% to 35%, depending on income brackets. Corporate income tax is generally 22%. Value Added Tax (VAT) is 11%.

The bustling skyline of Jakarta, Indonesia's capital.

Who Should (and Shouldn't) Move to Indonesia

Indonesia, particularly with its Expat-Skilled Regime, is ideal for:

• Skilled Professionals: Especially those in STEM fields (Science, Technology, Engineering, Mathematics) who can benefit from the four-year tax exemption on foreign income.
• Digital Nomads and Remote Workers: Seeking a vibrant lifestyle, lower cost of living, and a welcoming environment. While the Expat-Skilled Regime is specific, Indonesia is also developing other visa options for digital nomads.
• Entrepreneurs: Looking to tap into Southeast Asia's growing markets and a youthful, dynamic workforce.
• Retirees: Who appreciate a tropical climate, rich culture, and a relatively affordable cost of living, even if pension income might still be taxed in their home country due to DTAs.

It might be less suitable for:

• Individuals without specific skills: Who may not qualify for the preferential tax regimes and would be subject to standard Indonesian tax rates on worldwide income.
• Those seeking a completely tax-free environment: While the Expat-Skilled Regime offers significant benefits, it's not a zero-tax jurisdiction for all income types or indefinitely.

Residency Particulars for Indonesia

Obtaining residency in Indonesia involves several steps, primarily through various visa categories. For those seeking to benefit from the Expat-Skilled Regime, obtaining the appropriate work permit and residence permit (KITAS or KITAP) is crucial.

• Work Permit (IMTA) & Limited Stay Permit (KITAS): Foreigners intending to work in Indonesia generally require an IMTA and a KITAS. The KITAS is typically valid for 6-12 months and can be extended.
• Permanent Stay Permit (KITAP): After several years on a KITAS, individuals may be eligible for a KITAP, which offers more stability.
• Digital Nomad Visa: Indonesia has been actively exploring and implementing a specific visa for digital nomads, which aims to allow remote workers to stay for extended periods.
• Retirement Visa: Available for individuals aged 55 and above who meet certain financial criteria.

Tax residency is generally established if an individual is present in Indonesia for more than 183 days within a 12-month period, or if they intend to reside in Indonesia.

Tax Rates in Indonesia at a Glance

For individuals not covered by the Expat-Skilled Regime or after its expiration, Indonesian income tax rates are progressive:

Corporate Income Tax: Generally 22%.

Value Added Tax (VAT): 11%.

Double Taxation Agreements (DTAs): Indonesia has DTAs with numerous countries to prevent double taxation. It's crucial to consult these agreements, especially regarding pension income or income from other sources.

Taxation of Crypto Gains and Assets in Indonesia

Indonesia has taken steps to regulate and tax crypto assets. The trading of crypto assets is legal and overseen by the Commodity Futures Trading Regulatory Agency (Bappebti).

• VAT on Crypto Transactions: A VAT of 0.11% is imposed on crypto asset transactions.
• Income Tax on Crypto Transactions: A PPh (Income Tax) of 0.1% is levied on crypto asset transactions.
• Capital Gains: While the above taxes apply to transactions, the treatment of capital gains from crypto assets for individual investors is still evolving. It's generally subject to the standard income tax regime if considered as income.

It's important to note that the regulatory landscape for crypto is dynamic. Professional advice is recommended for individuals with significant crypto holdings or trading activities.

Avoiding the Boris Becker Sham Relocation Trap

The "Boris Becker trap" refers to the severe consequences of claiming residency in one country for tax purposes while actually maintaining your center of vital interests in another. To avoid this, your move to Indonesia must be genuine and demonstrable.

• Physical Presence: You must genuinely spend the majority of your time in Indonesia, adhering to the 183-day rule for tax residency.
• Center of Vital Interests: Your primary residence, family, social ties, and economic activities should demonstrably shift to Indonesia.
• Documentation: Maintain thorough records of your Indonesian residency, including rental agreements, utility bills, local bank accounts, and evidence of local social integration.
• Severing Ties: It is crucial to formally deregister from your previous country of residence and, where applicable, inform their tax authorities of your emigration.

A superficial move without genuine relocation of your life's center can lead to severe penalties, including back taxes, fines, and even criminal charges in your former country of residence.

What Makes Indonesia an Attractive Place to Live

Beyond the tax advantages, Indonesia offers a multitude of attractions:

• Rich Culture and Diversity: With over 360 ethnic groups, Indonesia boasts an incredibly rich tapestry of traditions, languages, and art forms.
• Stunning Natural Beauty: From the volcanic landscapes of Java to the pristine beaches of Bali and the unique wildlife of Komodo, Indonesia is a paradise for nature lovers.
• Warm Climate: A tropical climate year-round, perfect for those who enjoy sun and warmth.
• Affordable Cost of Living: Compared to Western countries, the cost of living in many parts of Indonesia is significantly lower, allowing for a high quality of life.
• Growing Economy: As a G20 member and one of the fastest-growing economies, Indonesia offers significant business and investment opportunities.
• Friendly Population: Indonesians are renowned for their hospitality and welcoming nature.

The unique Komodo Dragon, native to Indonesia's islands.

Cost of Living in Indonesia

The cost of living in Indonesia can vary significantly depending on the city or island. Major cities like Jakarta and popular tourist destinations like Bali will generally be more expensive than rural areas. However, overall, it remains considerably more affordable than most Western countries.

• Accommodation: A modern apartment in a city like Jakarta or a villa in Bali can range from $500 to $1,500+ per month. Outside these areas, costs can be much lower.
• Food: Local food is very inexpensive, with meals at warungs (local eateries) costing a few dollars. Western-style restaurants will be more expensive but still generally cheaper than in Europe or North America.
• Transportation: Public transport is affordable, and ride-hailing apps like Gojek and Grab are widely used and economical. Owning a car can be expensive due to import duties.
• Healthcare: Quality healthcare facilities are available, especially in major cities. Health insurance is highly recommended for expats.
• Utilities: Electricity, water, and internet are generally affordable.

A comfortable lifestyle for an individual in a desirable area like Bali or Jakarta might cost between $1,000 - $2,500 per month, depending on spending habits.

Tax Considerations When Leaving Your Home Country

When relocating from your home country to Indonesia, it's crucial to understand the potential tax implications of your departure, often referred to as "exit tax" or "emigration tax."

• Deemed Disposal of Assets: Some countries treat emigration as a "deemed disposal" of assets, meaning you might be taxed on unrealized capital gains as if you had sold your assets (e.g., shares, real estate) on the day of your departure.
• Pension and Social Security: Rules regarding pensions, social security contributions, and benefits can be complex. You may need to clarify how your pension will be taxed and if your social security contributions can be transferred or accessed.
• Final Tax Return: You will typically need to file a final tax return in your home country, covering the period up to your date of emigration.
• Double Taxation Agreements: Existing DTAs between your home country and Indonesia can influence how certain types of income (like pensions) are taxed.

It is highly recommended to consult with a tax advisor specializing in international tax law in your home country before your move to fully understand and mitigate any exit tax liabilities.

Correct Preparation

A successful relocation to Indonesia requires meticulous planning and preparation:

• Visa and Residency: Determine the most suitable visa category (e.g., Expat-Skilled, Digital Nomad, Retirement) and start the application process well in advance.
• Financial Planning: Open an Indonesian bank account, understand currency exchange rates, and plan for international money transfers.
• Healthcare: Secure comprehensive international health insurance that covers you in Indonesia.
• Accommodation: Research and arrange initial accommodation. Consider using reputable real estate agents.
• Language: While English is widely spoken in tourist areas and business circles, learning basic Bahasa Indonesia will greatly enhance your experience.
• Cultural Adaptation: Familiarize yourself with local customs, traditions, and etiquette to ensure a smooth transition.
• Tax Advice: Engage with tax professionals in both your home country and Indonesia to ensure compliance and optimize your tax situation.

A beautiful temple in Indonesia, reflecting its rich spiritual heritage.

Automatic Exchange of Information (OECD CRS)

Indonesia is a participating jurisdiction in the OECD's Common Reporting Standard (CRS), which mandates the automatic exchange of financial account information between tax authorities of participating countries.

• Transparency: Your financial accounts in Indonesia (and in your home country) will be reported to the relevant tax authorities if both countries are CRS participants.
• No Hiding: This system makes it virtually impossible to hide assets or income from tax authorities by holding them in foreign accounts.
• Compliance: It underscores the importance of being fully compliant with tax laws in both your country of origin and Indonesia.

The CRS aims to combat tax evasion and ensure tax transparency globally. Any financial institution you deal with in Indonesia will likely ask for your tax residency information to comply with CRS regulations.

How We Help With Your Move to Indonesia

Navigating the complexities of international relocation to Indonesia. Sebastian Sauerborn's team provides comprehensive support, from initial tax planning to establishing genuine residency. We handle the paperwork, coordinate with local advisors, and ensure your move is legally sound and tax-efficient.